Video 7:51
Funding black hole confronts both sides of politics

Both the Federal Government and Opposition are facing tough questions about how they'll pay for all of their policy promises ahead of the coming election.

Transcript

LEIGH SALES, PRESENTER: It's an old mantra, but a true one. Australian Federal elections are won on economic management and national security. And so, for the first fortnight of the parliamentary year, the election contenders have squared off in Parliament, hammering away at each other's economic credentials. The Government has taken some big hits having to defend ditching its surplus pledge and admitting its mining tax is raising a pittance. For its part the Coalition is a long way from filling in the detail of its economic plan. But as political editor Chris Uhlmann reports, no matter who wins the September poll, the incoming Government will have real problems balancing the books.

TONY ABBOTT, OPPOSITION LEADER: I remind her of the Treasurer's failure to deliver the promised surplus this financial year.

JULIA GILLARD, PRIME MINISTER: I know he is not interested in or confident with economics.

WAYNE SWAN, TREASURER: Don't take the axe to the social safety net and put a sledgehammer through our economy.

CHRIS UHLMANN, REPORTER: The battle for the economy is raging in Parliament.

TONY ABBOTT: ...and spending almost $100 billion more than in the last year of the Howard Government.

JOE HOCKEY, SHADOW TREASURER: Only Wayne Swan and Julia Gillard could design a tax that doesn't raise any money and leaves every Australian in debt.

CHRIS UHLMANN: There's plenty of ammunition from both sides and one joint task.

JULIA GILLARD: What everyone needs to do in this fiscal environment is identiy offsetting savings for new expenditure.

CHRIS UHLMANN: After the 2010 election, Treasury found the Opposition's policy costings were between $7 and $11 billion wide of the mark. That helped catapult Labor to Government.

REPORTER: Do you think this raises questions as to why Tony Abbott didn't want these policies costed by Treasury?

TONY WINDSOR, INDEPENDENT MP: I think that's the inference you can draw, that they had real problems themselves with the veracity of their numbers.

CHRIS UHLMANN: And the Coalition has repeatedly said it will make deep cuts should it win the September election.

JOE HOCKEY: Finding $50, $60 or $70 billion is about identifying waste, identifying areas where do you not need to proceed with programs.

CHRIS UHLMANN: The Coalition has identified some savings.

TONY ABBOTT: The Schoolkids Bonus will go, because it's a cash splash with borrowed money that has nothing to do with education.

CHRIS UHLMANN: The low income earners super contribution will also be cut, as will 12,000 public sector jobs, and plans to increase the humanitarian immigration intake to 20,000. But by its own measure that still leaves the Coalition billions short of its savings task. And the Government has more than a few problems of its own. Because since December, the economic strategy it's pursued for two years has unravelled.

WAYNE SWAN (Dec 2011): We will be pack in the black by 2012-13, on time, as promised.

(May 2012) Dramatically lower tax revenue now makes it unlikely there will be a surplus in 2012-13.

CHRIS UHLMANN: It's hard to overstate the significance of the surplus backdown, because it was the Government's own measure of economic success endlessly repeated.

(To Julia Gillard) Do you think people believe you when you say you're going to reach a small surplus by this time next year?

JULIA GILLARD: I think we are demonstrating in this Budget the real determination to deliver a surplus.

CHRIS UHLMANN: Things got worse last week when the first six months of Labor's signature mining tax delivered less than 10 per cent of the expected revenue.

WAYNE SWAN: Combined revenue from the first two quarters of the MRRT totalled $126 million.

CHRIS UHLMANN: Billions of dollars worth of payments were tied to the mining tax. So its failure to make that money has opened a new, large fiscal hole. The combination of the surplus retreat and the mining black hole has some Labor backbenchers and ministers complaining that their economic strategy has been derailed in the first weeks of an election year. Their private sentiments about the mining tax echo the Coalition's lines of attack.

IAN MACFARLANE, OPPOSITION RESOURCES SPOKESMAN: Julia Gillard failed in the negotiation, Wayne Swan got skinned alive. He went from being a swan to a plucked duck in one day.

CHRIS UHLMANN: But perhaps the biggest challenge lies ahead. Labor's re-election plan rests on raising another daunting charge against the public purse. The Government hasn't put a figure on the total cost of its National Disability Insurance Scheme and its education reform package, but 7.30 understands it will be about one per cent of gross domestic product. So the starting point in the first full year of both programs will be about $14 billion.

CHRIS RICHARDSON, DELOITTE ACCESS ECONOMICS: You're talking money that's not that much different to what the Government spends every year on Medicare. And that's a good yardstick. It's a reminder that we are talking very big dollars. That's not to say that the Government is not talking about important things with disability insurance and education, there are important things to be done there. But it will not be easy to scrape that money together.

CHRIS UHLMANN: All this comes at a time when there has been a collapse in Australia's national income.

JULIA GILLARD: Revenue has not returned in the way in which Treasury has predicted.

CHRIS UHLMANN: This isn't just the Government's problem. The Coalition supports the disability scheme, and it's signed up to many but not all of the promises funded by the mining and carbon taxes. It's also decried the pruning of the gefence budget, something raised with that department's secretary today.

DENNIS RICHARDSON, SECRETARY, DEFENCE DEPARTMENT: We have a number of pressures on the budget - both this year and also over the forward estimates.

CHRIS UHLMANN: Restoring the money cut from defence would add more than $5 billion a year to the Coalition's budget bill.

DENNIS RICHARDSON: The overall pie of national income is not growing that fast. It's hard for either side to make their sums add up. Now the good news is that China's looking better, iron ore prices are hooking better, things should recover, but that hasn't changed the basic fact that the Budget is still in trouble. And we are in an election year, a year of promises. But where those promises will be very difficult to pay for.

CHRIS UHLMANN: There are only two options to pay for them. Raise taxes or cut costs. Both carry risks. The Government could fund the disability scheme with a Medicare-style levy. But that opens up a tax fight. When it comes to big cuts you need to look at big programs. But four of the the top five costs to the federal purse come from social services. The pension $37 billion a year. The Family Tax Benefit, $20 billion. Medicare, $18 billion. Disability support, 15 billion. The Government has flagged changes to the tax treatment of high income earners' superannuation, so the Coalition is busy salting that ground.

JOE HOCKEY: The battle is not just in the Parliament, it's got to be outside the Parliament. And every family needs to know that the Government's coming after their savings. And they're going to increase the tax on their savings.

CHRIS UHLMANN: But if Australia is to afford its future, then tough choices will have to be made by someone.

DENNIS RICHARDSON: For a decade, Australia's prosperity has been on the back of the rise of China. That's great. It's really helped us in a number of ways. We cannot guarantee that ongoing. As a nation and our social compact with ourselves we now face rather more difficult choices. That's fine but we just need to be aware of them and vote on that informed basis.